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Contents
1. Welcome to the 2019 Level III SchweserNotes™
2. Learning Outcome Statements
3. Study Session 1—Code of Ethics and Standards of Professional Conduct
1. Readings 1 & 2: CFA Institute Code of Ethics and Standards of Professional
Conduct Guidance for Standards I–VII
1. Exam Focus
2. Module 1.1: Code and Standards
3. Module 2.1: Guidance for Standards I(A) and I(B)
4. Module 2.2: Guidance for Standards I(C) and I(D)
5. Module 2.3: Guidance for Standard II
6. Module 2.4: Guidance for Standards III(A) and III(B)
7. Module 2.5: Guidance for Standards III(C), III(D), and III(E)
8. Module 2.6: Guidance for Standard IV
9. Module 2.7: Guidance for Standard V
10. Module 2.8: Guidance for Standard VI
11. Module 2.9: Guidance for Standard VII
12. Answer Key for Module Quizzes
4. Study Session 2—Ethical and Professional Standards in Practice
1. Reading 3: Application of the Code and Standards
1. Exam Focus
2. Module 3.1: Cases
3. Key Concepts
4. Answer Key for Module Quiz
2. Reading 4: Asset Manager Code of Professional Conduct
1. Exam Focus
2. Module 4.1: The Asset Manager Code
3. Key Concepts
4. Answer Key for Module Quiz
5. Study Session 3—The Asset Management Industry and Professionalism
1. Reading 5: Overview of the Asset Management Industry and Portfolio
Management
1. Exam Focus
2. Module 5.1: The Asset Management Industry
3. Module 5.2: The Portfolio Management Process and Investment
Governance
4. Key Concepts
5. Answer Key for Module Quiz
2. Reading 6: Professionalism in Investment Management
1. Exam Focus
2. Module 6.1: Establishing Trust, Expectations, and Challenges of
Investment Management Professionals
3. Key Concepts
6.
7.
8.
9.
10.
4. Answer Key for Module Quiz
Topic Assessment: Ethical and Professional Standards
Topic Assessment Answers: Ethical and Professional Standards
Study Session 4—Behavioral Finance
1. Reading 7: The Behavioral Finance Perspective
1. Exam Focus
2. Module 7.1: Intro: Traditional Finance vs. Behavioral Finance
3. Module 7.2: Utility Theory and Prospect Theory
4. Module 7.3: Implications
5. Key Concepts
6. Answer Key for Module Quizzes
2. Reading 8: The Behavioral Biases of Individuals
1. Exam Focus
2. Module 8.1: Cognitive Errors vs. Emotional Biases
3. Module 8.2: Emotional Biases
4. Key Concepts
5. Answer Key for Module Quiz
3. Reading 9: Behavioral Finance and Investment Processes
1. Exam Focus
2. Module 9.1: Classifying Investors
3. Module 9.2: Implications: Clients and Their Portfolios
4. Module 9.3: Implications: Other
5. Key Concepts
6. Answer Key for Module Quizzes
Topic Assessment: Behavioral Finance
Topic Assessment Answers: Behavioral Finance
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Kaplan Schweser’s Path to Success
Level III CFA® Exam
Welcome
As the head of Advanced Designations at Kaplan Schweser, I am pleased to
have the opportunity to help you prepare for the CFA® exam. Kaplan Schweser
has decades of experience in delivering the most effective CFA exam prep
products in the market and I know you will find them to be invaluable in your
studies.
Our products are designed to be an integrated study solution across print and
digital media to provide you the best learning experience, whether you are
studying with a physical book, online, or on your mobile device.
Our core product, the SchweserNotes™, addresses all of the Topics, Study
Sessions, Readings, and LOS in the CFA curriculum. Each reading in the
SchweserNotes has been broken into smaller, bite-sized modules with Module
Quizzes interspersed throughout to help you continually assess your
comprehension. Topic Assessments appear at the end of each Topic to help
you assess your knowledge of the material before you move on to the next
section.
All purchasers of the SchweserNotes receive online access to the Kaplan
Schweser online platform (our learning management system or LMS) at
www.Schweser.com. In the LMS, you will see a dashboard that tracks your
overall progress and performance and also includes an Activity Feed, which
provides structure and organization to the tasks required to prepare for the CFA
exam. You also have access to the SchweserNotes, Module Quizzes, and
Topic Assessments content as well as the Video Lectures (if purchased), which
contain a short video that complements each module in the SchweserNotes.
Look for the icons indicating where video content, Module Quizzes, and Topic
Assessments are available online. I strongly encourage you to enter your
Module Quiz and Topic Assessment answers online and use the dashboard to
track your progress and stay motivated.
Again, thank you for trusting Kaplan Schweser with your CFA exam preparation.
We’re here to help you throughout your journey to become a CFA charterholder.
Regards,
Derek Burkett
Derek Burkett, CFA, FRM, CAIA
Vice President (Advanced Designations)
CFA®
Contact us for questions about your study package, upgrading your package, purchasing
additional study materials, or for additional information:
888.325.5072 (U.S.) | +1 608.779.8327 (Int’l.)
staff@schweser.com | www.schweser.com/cfa
WELCOME TO THE 2019 LEVEL III
SCHWESERNOTES™
Thank you for trusting Kaplan Schweser to help you reach your goals. Our goal is to
increase your chances of correctly understanding the Level III material and passing the
exam. Unfortunately, candidates who assume Level III will be the same as Levels I and
II often do poorly. The solution is simple: work smarter, not harder. Smarter, as you will
see, does not mean just more of what you did at Levels I and II.
The Level III exam is half constructed response questions. The purpose of
constructed response questions is to test higher level thinking, judgment, and the
ability to organize a response. It differentiates how well candidates know the material.
A good constructed response question is one that a high percentage of candidates could
answer if shown answer choices A, B, and C but they are unable to answer the same
question in constructed response form. The exam is also highly integrated across
subjects. If you check the fine print from the CFA Institute, it will tell you that 85%–
90% is portfolio management. The other 10%–15% is ethics and guess what the focus
of ethics will be? Portfolio management.
Your previous study skills are useful but generally insufficient for Level III. Let me
stress three related things you will need to do. First, finish all the readings, classes,
and basic question practice a month before the exam. Integrate these three tasks
(class, reading, and related practice questions). At Levels I and II, most of you got most
of this done just before the exam. Second, spend the last month focused on taking,
reviewing, and retaking practice exams. Third, spend a lot of time writing. Buy three
new blue or black ink ball point pens and a wide-rule spiral notebook. Use them only
for writing out answers to practice questions. Wear them out before the exam. We’ll
return to these three requirements in our material, particularly in the classes.
Basic Preparation
The SchweserNotes™ are the base of our material. Five volumes cover all 18 Study
Sessions and every Learning Outcome Statement (LOS). There are examples, Key
Concepts, and Concept Checker questions for every reading. These SchweserNotes™
provide the base for your preparation and initial practice. Basic preparation should be
completed a month before the exam.
Study Planning
To be successful, you need a study plan. The simplest approach is to divide the
material so you read and practice each week, finishing the material and allowing a
month for intense review. Our classes are a good way to provide structure to your
plan. A good study plan includes the following.
Complete initial reading and question practice approximately a month before
the exam.
Initial reading of SchweserNotes™ and/or CFA readings.
Complete practice questions in our SchweserNotes™, discussion questions
in our ClassNotes, and SchweserPro™ QBank questions. Work questions
every week or time can get away from you.
Complete additional end-of-chapter questions in the CFA readings as time
allows.
Periodically review previous sessions.
Use your last month of study for final prep and performance.
Alternate your practice between a Schweser practice exam and an old CFA
morning exam. There is no specific number that results in passing.
However, the equivalent of seven full exams has been associated with
success at Level III. That number is higher than for Levels I and II.
What you do after taking a practice exam is equally important. When you
discover an area that appears more than once and you do poorly, review that
material, identify your mistakes, and correct them.
Use the last 7 to 10 days to retake practice exams to solidify skills (particularly
in constructed response) and verify that you can successfully perform what you
now know how to do.
We also have a range of other resources available. You can find more details at
Schweser.com; just sign in using the individual username and password you received
when you purchased the SchweserNotes™. I’ll highlight a few next.
Weekly Classes
Live Weekly Classroom Programs We offer weekly classroom programs around the
world. Please check Schweser.com for locations, dates, and availability. The classes can
save you time by directing you where to focus in each reading and provide additional
questions to work during and after class. The class material includes class discussion
questions so you can practice solving and writing exam-like questions with the
instructor’s guidance.
Both the live and online class candidates receive a weekly class letter that highlights
important issues, specific study hints, and possible pitfalls for that week’s material. It
regularly addresses that key stumbling block: the constructed response questions.
15-Week Online Classes Our Live Online Weekly Classes can be watched live and are
archived after each class for viewing and review at any time. Our online (and most of
our in-person) classes follow the study session order. Before the first class, we
recommend you read the SchweserNotes™ for Study Sessions 1 through 4. The
tentative class schedule is as follows.
Class #
Class #
1) How to Study Ethics, the Asset Management Industry and
Professionalism, and Behavioral Finance; SS1, 2, 3, and 4
9) Fixed Income; SS11
2) PM—Individuals; SS5
10) Fixed Income and Equity; SS12, 13
3) PM—Individuals; SS5, 6
11) Equity and Alternative
Investments; SS14, 15
4) PM—Individuals and Institutional; SS6, 7
12) Risk Management and Derivatives;
SS16, 17
5) PM Institutional and Applied Economics; SS7, 8
13) Derivatives; SS17
6) Applied Economics; SS8
14) Trading and Performance
Evaluation; SS18, 19
7) Asset Allocation 1; SS9
15) Performance Evaluation, How to
Study GIPS, and Exam Tips; SS19
8) Asset Allocation 2; SS10
Class time focuses on key issues in each topic area and applied problem solving of
questions. Candidates who wish for more background also have our Video Lectures
that provide more basic LOS-by-LOS coverage.
Late Season Preparation
The material discussed above is intended for basic preparation and initial practice. The
last month should focus on practice exams with intense review, practice, and
performance.
Multi-Day Review Workshops These pull together the material and focus on problem
solving with additional questions. Our most complete late-season review courses are
residence programs in Windsor, Ontario (WindsorWeek), Dallas/Fort Worth, Texas
(DFW five-day program), and the New York five-day program. We also offer three-day
Exam Workshops in many cities (and online) that combine curriculum review and
hands-on practice with hundreds of questions plus problem-solving techniques. Please
check Schweser.com for locations, dates, and availability.
Mock Exam and Multimedia Tutorial The Schweser Mock Exam is offered live in
many cities around the world and online as well. The optional Multimedia Tutorial
provides extended explanation and topic tutorials to get you exam-ready in areas where
you missed questions on the Mock Exam. Please check Schweser.com for locations,
dates, and availability.
Practice Exams We have two volumes with two, full six-hour exams in each. In
addition to the answers, we discuss how points are allocated for each constructed
response question.
Past Exam Questions The CFA old exam questions for the morning session of the
exam are released and are part of your final review. In the Resource Library, we provide
videos and work through how to solve each past question. But remember to work smart;
the old exams are only a sample of what may be asked, so combine them with the
Schweser practice exams.
Schweser’s Secret Sauce® One brief volume highlights key material. It will not replace
the full SchweserNotes™ and classes but it is a great review tool for the last month.
How to Succeed
There are no shortcuts. Count on the CFA Institute to think of test angles they have not
shown before. Begin your study early and with a plan. Read the SchweserNotes™.
Attend a live or online class each week and work practice questions. Take quizzes often
using SchweserPro™ QBank. At the end of each topic area, take the Self-Test to check
your progress. Review previous topics periodically. Use the CFA texts to supplement
weak areas and for additional end-of-chapter questions. Finish this initial study a month
before the exam so you have sufficient time to take, review, and retake Practice Exams.
I would like to thank Kurt Schuldes, CFA, CAIA, and Level III content specialist, for
his contributions to the 2019 Level III SchweserNotes™ for the CFA Exam.
Time to hit the books,
David Hetherington
David Hetherington, CFA
VP and Level III CFA manager
Kaplan Schweser
专业提供CFA/FRM/AQF视频课程资料 微信：fcayyh
Exam Topic Weights
The CFA Institute has indicated that these are guidelines only and not specific
rules they will follow. They are also subject to change. At Level III, all topics except
ethics can be integrated into portfolio management questions. The guidelines
provide a rough indication of how to allocate your initial study time. The most accurate
interpretation of Level III is that it is 100% portfolio management.
Exam Format
The morning and afternoon of the exam use different exam formats. Each is three hours
long. Both have a maximum score of 180 points out of the total maximum exam score
of 360 points.
The morning exam is three hours of constructed response questions. Usually there are 8
to 12 questions with each question having multiple parts. For each question part, you
will be directed to answer on a specific page in the exam book. If you do not answer
where directed, you will receive no score for that question part. The morning is usually
heavily devoted to portfolio management questions. Every question will state a
specified number of minutes. The minutes are the max score you can receive for that
question. Most questions do not have one specific right answer but a range of acceptable
versus unacceptable answers. Partial credit for an answer is normal.
The afternoon is the multiple choice, item set style of question from Level II. It’s three
hours for 10 six-question vignettes. Ten times six is 60 individual questions and each
has a score of three points. For each question there is one correct answer: A, B, or C.
LEARNING OUTCOME STATEMENTS (LOS)
STUDY SESSION 1
The topical coverage corresponds with the following CFA Institute assigned reading:
1. & 2. CFA Institute Code of Ethics and Standards of Professional
Conduct Guidance for Standards I–VII
The candidate should be able to:
1.a. describe the structure of the CFA Institute Professional Conduct Program and the
disciplinary review process for the enforcement of the CFA Institute Code of
Ethics and Standards of Professional Conduct. (page 2)
1.b. explain the ethical responsibilities required by the Code and Standards, including
the sub-sections of each standard. (page 3)
2.a. demonstrate a thorough knowledge of the CFA Institute Code of Ethics and
Standards of Professional Conduct by interpreting the Code and Standards in
various situations involving issues of professional integrity. (page 8)
2.b. recommend practices and procedures designed to prevent violations of the Code
and Standards. (page 8)
STUDY SESSION 2
The topical coverage corresponds with the following CFA Institute assigned reading:
3. Application of the Code and Standards
The candidate should be able to:
a. evaluate professional conduct and formulate an appropriate response to actions that
violate the CFA Institute Code of Ethics and Standards of Professional Conduct.
(page 41)
b. formulate appropriate policy and procedural changes needed to assure compliance
with the Code and Standards. (page 41)
The topical coverage corresponds with the following CFA Institute assigned reading:
4. Asset Manager Code of Professional Conduct
The candidate should be able to:
a. explain the purpose of the Asset Manager Code and the benefits that may accrue to
a firm that adopts the Code. (page 55)
b. explain the ethical and professional responsibilities required by the six General
Principles of Conduct of the Asset Manager Code. (page 56)
c. determine whether an asset manager’s practices and procedures are consistent with
the Asset Manager Code. (page 56)
d. recommend practices and procedures designed to prevent violations of the Asset
Manager Code. (page 56)
STUDY SESSION 3
The topical coverage corresponds with the following CFA Institute assigned reading:
5. Overview of the Asset Management Industry and Portfolio
Management
The candidate should be able to:
a. describe the structure of the asset management industry. (page 68)
b. discuss a portfolio management process that supports achieving asset owners’
objectives. (page 72)
c. discuss the elements of effective investment governance. (page 73)
The topical coverage corresponds with the following CFA Institute assigned reading:
6. Professionalism in Investment Management
The candidate should be able to:
a. describe professions and how they establish trust. (page 79)
b. explain professionalism in investment management. (page 80)
c. describe expectations of and challenges for investment management professionals.
(page 81)
STUDY SESSION 4
The topical coverage corresponds with the following CFA Institute assigned reading:
7. The Behavioral Finance Perspective
The candidate should be able to:
a. contrast traditional and behavioral finance perspectives on investor decision
making. (page 107)
b. contrast expected utility and prospect theories of investment decision making.
(page 112)
c. discuss the effect that cognitive limitations and bounded rationality may have on
investment decision making. (page 115)
d. compare traditional and behavioral finance perspectives on portfolio construction
and the behavior of capital markets. (page 121)
The topical coverage corresponds with the following CFA Institute assigned reading:
8. The Behavioral Biases of Individuals
The candidate should be able to:
a. distinguish between cognitive errors and emotional biases. (page 135)
b. discuss commonly recognized behavioral biases and their implications for financial
decision making. (page 136)
c. identify and evaluate an individual’s behavioral biases. (page 136)
d. evaluate how behavioral biases affect investment policy and asset allocation
decisions and recommend approaches to mitigate their effects. (page 136)
The topical coverage corresponds with the following CFA Institute assigned reading:
9. Behavioral Finance and Investment Processes
The candidate should be able to:
a. explain the uses and limitations of classifying investors into personality types.
(page 157)
b. discuss how behavioral factors affect adviser–client interactions. (page 162)
c. discuss how behavioral factors influence portfolio construction. (page 163)
d. explain how behavioral finance can be applied to the process of portfolio
construction. (page 165)
e. discuss how behavioral factors affect analyst forecasts and recommend remedial
actions for analyst biases. (page 166)
f. discuss how behavioral factors affect investment committee decision making and
recommend techniques for mitigating their effects. (page 170)
g. describe how behavioral biases of investors can lead to market characteristics that
may not be explained by traditional finance. (page 171)
The following is a review of the Code of Ethics and Standards of Professional Conduct principles designed
to address the learning outcome statements set forth by CFA Institute. Cross-Reference to CFA Institute
Assigned Readings #1 and #2.
READINGS 1 & 2: CFA INSTITUTE CODE
OF ETHICS AND STANDARDS OF
PROFESSIONAL CONDUCT GUIDANCE
FOR STANDARDS I–VII
Study Session 1
EXAM FOCUS
Ethics will most likely be 10%–15% of the exam with two or three item set questions.
While the CFA Institute has never specifically said they will not use constructed
responses for ethics, they have not done so for over 10 years. The content and what you
need to know will be the same regardless of the question format.
Level III questions tend to focus on compliance, portfolio management issues, and
questions on the Asset Manager Code. Prepare properly and ethics can be an easier
section of the exam. That is a big advantage when you move to the questions in other
topic areas.
Just like Level I and Level II, ethics requires that you know the principles and be able to
apply them to specific situations to make the expected decision. Some ethics questions
can be vague with unclear facts so be prepared to make a “best guess” on a few of the
questions. As you read the material, pay particular attention to the numerous examples
(the application). As soon as you read, work the Schweser and CFA end of chapter
questions. Reading principles without practice questions for application or vice versa
will not be sufficient. You need both.
Be prepared and make this an easier part of the exam.
MODULE 1.1: CODE AND STANDARDS
LOS 1.a: Describe the structure of the CFA Institute Professional
Conduct Program and the disciplinary review process for the
enforcement of the CFA Institute Code of Ethics and Standards of
Professional Conduct.
Video covering
this content is
available online.
CFA® Program Curriculum, Volume 1, page 9
The CFA Institute Professional Conduct Program is covered by the CFA Institute
Bylaws and the Rules of Procedure for Proceedings Related to Professional Conduct.
The Program is based on the principles of fairness of the process to members and
candidates and maintaining the confidentiality of the proceedings. The Disciplinary
Review Committee of the CFA Institute Board of Governors has overall responsibility
for the Professional Conduct Program and enforcement of the Code and Standards.
The CFA Institute Professional Conduct staff conducts inquiries related to professional
conduct. Several circumstances can prompt such an inquiry:
1. Self-disclosure by members or candidates on their annual Professional Conduct
Statements of involvement in civil litigation or a criminal investigation, or that the
member or candidate is the subject of a written complaint.
2. Written complaints about a member or candidate’s professional conduct that are
received by the Professional Conduct staff.
3. Evidence of misconduct by a member or candidate that the Professional Conduct
staff received through public sources, such as a media article or broadcast.
4. A report by a CFA exam proctor of a possible violation during the examination.
5. Analysis of exam materials and monitoring of social media by CFA Institute.
Once an inquiry has begun, the Professional Conduct staff may request (in writing) an
explanation from the subject member or candidate and may: (1) interview the subject
member or candidate, (2) interview the complainant or other third parties, and/or (3)
collect documents and records relevant to the investigation.
The Professional Conduct staff may decide: (1) that no disciplinary sanctions are
appropriate, (2) to issue a cautionary letter, or (3) to discipline the member or candidate.
In a case where the Professional Conduct staff finds a violation has occurred and
proposes a disciplinary sanction, the member or candidate may accept or reject the
sanction. If the member or candidate chooses to reject the sanction, the matter will be
referred to a disciplinary review panel of CFA Institute members for a hearing.
Sanctions imposed may include condemnation by the member’s peers or suspension of
candidate’s continued participation in the CFA Program.
LOS 1.b: Explain the ethical responsibilities required by the Code and Standards,
including the sub-sections of each standard.
CFA® Program Curriculum, Volume 1, page 15
CODE OF ETHICS
Members of CFA Institute [including Chartered Financial Analyst® (CFA®)
charterholders] and candidates for the CFA designation (“Members and Candidates”)
must:1
Act with integrity, competence, diligence, respect, and in an ethical manner with
the public, clients, prospective clients, employers, employees, colleagues in the
investment profession, and other participants in the global capital markets.
Place the integrity of the investment profession and the interests of clients above
their own personal interests.
Use reasonable care and exercise independent professional judgment when
conducting investment analysis, making investment recommendations, taking
investment actions, and engaging in other professional activities.
Practice and encourage others to practice in a professional and ethical manner that
will reflect credit on themselves and the profession.
Promote the integrity and viability of the global capital markets for the ultimate
benefit of society.
Maintain and improve their professional competence and strive to maintain and
improve the competence of other investment professionals.
THE STANDARDS OF PROFESSIONAL CONDUCT
I.
II.
III.
IV.
V.
VI.
VII.
Professionalism
Integrity of Capital Markets
Duties to Clients
Duties to Employers
Investment Analysis, Recommendations, and Actions
Conflicts of Interest
Responsibilities as a CFA Institute Member or CFA Candidate
STANDARDS OF PROFESSIONAL CONDUCT2
I. PROFESSIONALISM
A. Knowledge of the Law. Members and Candidates must understand and
comply with all applicable laws, rules, and regulations (including the CFA
Institute Code of Ethics and Standards of Professional Conduct) of any
government, regulatory organization, licensing agency, or professional
association governing their professional activities. In the event of conflict,
Members and Candidates must comply with the more strict law, rule, or
regulation. Members and Candidates must not knowingly participate or
assist in any violation of laws, rules, or regulations and must disassociate
themselves from any such violation.
B. Independence and Objectivity. Members and Candidates must use
reasonable care and judgment to achieve and maintain independence and
objectivity in their professional activities. Members and Candidates must
not offer, solicit, or accept any gift, benefit, compensation, or consideration
that reasonably could be expected to compromise their own or another’s
independence and objectivity.
C. Misrepresentation. Members and Candidates must not knowingly make
any misrepresentations relating to investment analysis, recommendations,
actions, or other professional activities.
D. Misconduct. Members and Candidates must not engage in any professional
conduct involving dishonesty, fraud, or deceit or commit any act that
reflects adversely on their professional reputation, integrity, or competence.
II. INTEGRITY OF CAPITAL MARKETS
A. Material Nonpublic Information. Members and Candidates who possess
material nonpublic information that could affect the value of an investment
must not act or cause others to act on the information.
B. Market Manipulation. Members and Candidates must not engage in
practices that distort prices or artificially inflate trading volume with the
intent to mislead market participants.
III. DUTIES TO CLIENTS
A. Loyalty, Prudence, and Care. Members and Candidates have a duty of
loyalty to their clients and must act with reasonable care and exercise
prudent judgment. Members and Candidates must act for the benefit of their
clients and place their clients’ interests before their employer’s or their own
interests.
B. Fair Dealing. Members and Candidates must deal fairly and objectively
with all clients when providing investment analysis, making investment
recommendations, taking investment action, or engaging in other
professional activities.
C. Suitability.
1. When Members and Candidates are in an advisory relationship with a
client, they must:
a. Make a reasonable inquiry into a client’s or prospective clients’
investment experience, risk and return objectives, and financial
constraints prior to making any investment recommendation or
taking investment action and must reassess and update this
information regularly.
b. Determine that an investment is suitable to the client’s financial
situation and consistent with the client’s written objectives,
mandates, and constraints before making an investment
recommendation or taking investment action.
c. Judge the suitability of investments in the context of the client’s
total portfolio.
2. When Members and Candidates are responsible for managing a
portfolio to a specific mandate, strategy, or style, they must make only
investment recommendations or take investment actions that are
consistent with the stated objectives and constraints of the portfolio.
D. Performance Presentation. When communicating investment performance
information, Members or Candidates must make reasonable efforts to ensure
that it is fair, accurate, and complete.
E. Preservation of Confidentiality. Members and Candidates must keep
information about current, former, and prospective clients confidential
unless:
1. The information concerns illegal activities on the part of the client or
prospective client,
2. Disclosure is required by law, or
3. The client or prospective client permits disclosure of the information.
IV. DUTIES TO EMPLOYERS
A. Loyalty. In matters related to their employment, Members and Candidates
must act for the benefit of their employer and not deprive their employer of
the advantage of their skills and abilities, divulge confidential information,
or otherwise cause harm to their employer.
B. Additional Compensation Arrangements. Members and Candidates must
not accept gifts, benefits, compensation, or consideration that competes
with, or might reasonably be expected to create a conflict of interest with,
their employer’s interest unless they obtain written consent from all parties
involved.
C. Responsibilities of Supervisors. Members and Candidates must make
reasonable efforts to ensure that anyone subject to their supervision or
authority complies with applicable laws, rules, regulations, and the Code
and Standards.
V. INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS
A. Diligence and Reasonable Basis. Members and Candidates must:
1. Exercise diligence, independence, and thoroughness in analyzing
investments, making investment recommendations, and taking
investment actions.
2. Have a reasonable and adequate basis, supported by appropriate
research and investigation, for any investment analysis,
recommendation, or action.
B. Communication with Clients and Prospective Clients. Members and
Candidates must:
1. Disclose to clients and prospective clients the basic format and general
principles of the investment processes used to analyze investments,
select securities, and construct portfolios and must promptly disclose
any changes that might materially affect those processes.
2. Disclose to clients and prospective clients significant limitations and
risks associated with the investment process.
3. Use reasonable judgment in identifying which factors are important to
their investment analyses, recommendations, or actions and include
those factors in communications with clients and prospective clients.
4. Distinguish between fact and opinion in the presentation of investment
analysis and recommendations.
C. Record Retention. Members and Candidates must develop and maintain
appropriate records to support their investment analysis, recommendations,
actions, and other investment-related communications with clients and
prospective clients.
VI. CONFLICTS OF INTEREST
A. Disclosure of Conflicts. Members and Candidates must make full and fair
disclosure of all matters that could reasonably be expected to impair their
independence and objectivity or interfere with respective duties to their
clients, prospective clients, and employer. Members and Candidates must
ensure that such disclosures are prominent, are delivered in plain language,
and communicate the relevant information effectively.
B. Priority of Transactions. Investment transactions for clients and employers
must have priority over investment transactions in which a Member or
Candidate is the beneficial owner.
C. Referral Fees. Members and Candidates must disclose to their employer,
clients, and prospective clients, as appropriate, any compensation,
consideration, or benefit received from, or paid to, others for the
recommendation of products or services.
VII. RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA
CANDIDATE
A. Conduct as Participants in CFA Institute Programs. Members and
Candidates must not engage in any conduct that compromises the reputation
or integrity of CFA Institute or the CFA designation or the integrity,
validity, or security of CFA Institute programs.
B. Reference to CFA Institute, the CFA Designation, and the CFA
Program. When referring to CFA Institute, CFA Institute membership, the
CFA designation, or candidacy in the CFA Program, Members and
Candidates must not misrepresent or exaggerate the meaning or implications
of membership in CFA Institute, holding the CFA designation, or candidacy
in the CFA Program.
MODULE QUIZ 1.1
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1. In the case of a complaint about a member’s professional conduct, CFA Institute
Professional Conduct Program staff are least likely to:
A. review documents and records related to the complaint.
B. request an interview with the member or with the party making the
complaint.
C. suspend the member’s right to use the CFA designation while an
investigation is in progress.
2. Which of the following requirements for members and candidates is one of the
2. Which of the following requirements for members and candidates is one of the
six components of the Code of Ethics?
A. Maintain and improve their professional competence.
B. Do not act or cause others to act on material nonpublic information.
C. Distinguish between fact and opinion when presenting investment analysis.
3. If a member or candidate is offered an additional compensation arrangement by
a client, which of the seven Standards of Professional Conduct states the
requirements the member or candidate must follow?
A. Duties to Clients.
B. Conflicts of Interest.
C. Duties to Employers.
LOS 2.a: Demonstrate a thorough knowledge of the CFA Institute Code of Ethics
and Standards of Professional Conduct by interpreting the Code and Standards in
various situations involving issues of professional integrity.
LOS 2.b: Recommend practices and procedures designed to prevent violations of
the Code and Standards.
CFA® Program Curriculum, Volume 1, page 21
PROFESSOR’S NOTE
You should be prepared for questions that require you to apply the Standards in specific case
situations. In such questions, you must recognize the case facts described and then decide
which Standards are directly relevant. This is primarily a test of critical thinking, not of
memorization. To prepare you, we will in this section focus on a review of the key points for
each Standard and the recommended procedures. If you know the main issues, you are more
likely to successfully apply them. You should review the recommended procedures several
times between now and exam day because they fit the Level III emphasis on the bigger
picture and managing the business as well as portfolios and assets. Once you complete our
review and understand the basic principles that you must know, then move to application and
practice. For practice, complete our sample questions. The CFA reading includes many
examples of applying the Standards, and you should read all the examples as well as
complete the CFA end of chapter questions for this reading.
It is important you know the basic principals before you move to the specific examples and
questions. Those examples and question can only be a sample of possible applications. When
you try to learn by practice only, without first knowing the principals that are being applied,
you generally get the wrong ideas. Prepare and practice are two different steps. The
combination is what leads to success. Do both.
In many cases the actions that members and candidates must not take are explained
using terms open to interpretation, such as “reasonable,” “adequate,” and “token.”
Some examples from the Standards themselves are:
…use reasonable care and judgment to achieve…
…accept any gift, that reasonably could be expected to compromise…
…act with reasonable care and exercise prudent judgment…
…deal fairly and objectively with all clients…
...make a reasonable inquiry into…
…make reasonable efforts to ensure…
…might reasonably be expected to create a conflict of interest with…
…Have a reasonable and adequate basis…
…Use reasonable judgment in…
…matters that could be reasonably expected to impair…
The requirement of the LOS is that you know what constitutes a violation, not that you
draw a distinction between what is “reasonable” and what is not in a given situation. We
believe the exam writers take this into account and that if they intend, for example, to
test whether a recommendation has been given without reasonable care and judgment, it
will likely be clear either that the care and judgment exhibited by the analyst did not rise
to the level of “reasonable,” or that it did.
No monetary value for a “token” gift is given in the Standards, although it is
recommended that a firm establish such a monetary value for its employees. Here,
again, the correct answer to a question will not likely hinge on candidate’s
determination of what is a token gift and what is not. Questions should be clear in this
regard. A business dinner is likely a token gift, but a week at a condominium in Aspen
or tickets to the Super Bowl are likely not. Always look for clues in the questions that
lead you to the question-writer’s preferred answer choice, such as “lavish”
entertainment and “luxury” accommodations.
Next, we present a summary of each subsection of the Standards of Professional
Conduct. For each one, we first detail actions that violate the Standard and then list
actions and behaviors that are recommended within the Standards. We suggest you learn
the violations especially well so you understand that the other items are recommended.
For the exam, it is not necessary to memorize the Standard number and subsection
letter. Knowing that an action violates, for example, Professionalism, rather than Duties
to Employers or Duties to Clients, should be sufficient in this regard. Note that some
actions may violate more than one Standard.
One way to write questions for this material is to offer a reason that might make one
believe a Standard does not apply in a particular situation. In most, if not all, cases the
“reason” does not change the requirement of the Standard. If you are prohibited from
some action, the motivations for the action or other circumstances simply do not matter.
If the Standard says it’s a violation, it’s a violation. An exception is when intent is key
to the Standard, such as intending to mislead clients or market participants in general.
MODULE 2.1: GUIDANCE FOR STANDARDS
I(A) AND I(B)
STANDARD I: PROFESSIONALISM3
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Standard I(A) Knowledge of the Law
Members and Candidates must understand and comply with all applicable laws, rules,
and regulations (including the CFA Institute Code of Ethics and Standards of
Professional Conduct) of any government, regulatory organization, licensing agency,
or professional association governing their professional activities. In the event of
conflict, Members and Candidates must comply with the more strict law, rule, or
regulation. Members and Candidates must not knowingly participate or assist in and
must dissociate from any violation of such laws, rules, or regulations.
The Standards begin with a straightforward statement: Don’t violate any laws, rules, or
regulations that apply to your professional activities. This includes the Code and
Standards, so any violation of the Code and Standards will also violate this subsection.
A member may be governed by different rules and regulations among the Standards, the
country in which the member resides, and the country where the member is doing
business. Follow the most strict of these, or, put another way, do not violate any of the
three sets of rules and regulations.
If you know that violations of applicable rules or laws are taking place, either by
coworkers or clients, you must approach your supervisor or compliance department to
remedy the situation. If they will not or cannot, then you must dissociate from the
activity (e.g., not working with a trading group you know is not allocating client trades
properly according to the Standard on Fair Dealing, or not using marketing materials
that you know or should know are misleading or erroneous). If this cannot be
accomplished, you may, in an extreme case, have to resign from the firm to be in
compliance with this Standard.
Recommendations for members
Establish, or encourage employer to establish, procedures to keep employees
informed of changes in relevant laws, rules, and regulations.
Review, or encourage employer to review, the firm’s written compliance
procedures on a regular basis.
Maintain, or encourage employer to maintain, copies of current laws, rules, and
regulations.
When in doubt about legality, consult supervisor, compliance personnel, or a
lawyer.
When dissociating from violations, keep records documenting the violations,
encourage employer to bring an end to the violations.
There is no requirement in the Standards to report wrongdoers, but local law may
require it; members are “strongly encouraged” to report violations to CFA
Institute Professional Conduct Program.
Recommendations for firms
Have a code of ethics.
Provide employees with information on laws, rules, and regulations governing
professional activities.
Have procedures for reporting suspected violations.
Standard I(B) Independence and Objectivity
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Members and Candidates must use reasonable care and judgment to achieve and
maintain independence and objectivity in their professional activities. Members and
Candidates must not offer, solicit, or accept any gift, benefit, compensation, or
consideration that reasonably could be expected to compromise their own or another’s
independence and objectivity.
Analysts may face pressure or receive inducements to give a security a specific rating,
to select certain outside managers or vendors, or to produce favorable or unfavorable
research and conclusions. Members who allow their investment recommendations or
analysis to be influenced by such pressure or inducements will have violated the
requirement to use reasonable care and to maintain independence and objectivity in their
professional activities. Allocating shares in oversubscribed IPOs to personal accounts is
a violation.
Normal business entertainment is permitted. Members who accept, solicit, or offer
things of value that could be expected to influence the member’s or others’
independence or objectivity are violating the Standard. Gifts from clients are considered
less likely to compromise independence and objectivity than gifts from other parties.
Client gifts must be disclosed to the member’s employer prior to acceptance, if possible,
but after acceptance, if not.
Members may prepare reports paid for by the subject firm if compensation is a flat rate
not tied to the conclusions of the report (and if the fact that the research is issuer-paid is
disclosed). Accepting compensation that is dependent on the conclusions,
recommendations, or market impact of the report, and failure to disclose that research is
issuer-paid, are violations of this Standard.
Recommendations for members
Members or their firms should pay for their own travel to company events or tours when
practicable and limit use of corporate aircraft to trips for which commercial travel is not
an alternative.
Recommendations for firms
Establish policies requiring every research report to reflect the unbiased opinion
of the analyst and align compensation plans to support this principal.
Establish and review written policies and procedures to assure research is
independent and objective.
Establish restricted lists of securities for which the firm is not willing to issue
adverse opinions. Factual information may still be provided.
Limit gifts from non-clients to token amounts.
Limit and require prior approval of employee participation in equity IPOs.
Establish procedures for supervisory review of employee actions.
Appoint a senior officer to oversee firm compliance and ethics.
MODULE 2.2: GUIDANCE FOR STANDARDS I(C) AND I(D)
Standard I(C) Misrepresentation
Members and Candidates must not knowingly make any
misrepresentations relating to investment analysis, recommendations,
actions, or other professional activities.
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Misrepresentation includes knowingly misleading investors, omitting relevant
information, presenting selective data to mislead investors, and plagiarism. Plagiarism is
using reports, forecasts, models, ideas, charts, graphs, or spreadsheets created by others
without crediting the source. Crediting the source is not required when using
projections, statistics, and tables from recognized financial and statistical reporting
services. When using models developed or research done by other members of the firm,
it is permitted to omit the names of those who are no longer with the firm as long as the
member does not represent work previously done by others as his alone.
Actions that would violate the Standard include:
Presenting third-party research as your own, without attribution to the source.
Guaranteeing a specific return on securities that do not have an explicit guarantee
from a government body or financial institution.
Selecting a valuation service because it puts the highest value on untraded security
holdings.
Selecting a performance benchmark that is not comparable to the investment
strategy employed.
Presenting performance data or attribution analysis that omits accounts or relevant
variables.
Offering false or misleading information about the analyst’s or firm’s capabilities,
expertise, or experience.
Using marketing materials from a third party (outside advisor) that are misleading.
Recommendations for members
Understand the scope and limits of the firm’s capabilities to avoid inadvertent
misrepresentations.
Summarize your own qualifications and experience.
Make reasonable efforts to verify information from third parties that is provided to
clients.
Regularly maintain webpages for accuracy.
Avoid plagiarism by keeping copies of all research reports and supporting
documents and attributing direct quotes, paraphrases, and summaries to their
source.
Standard I(D) Misconduct
Members and Candidates must not engage in any professional conduct involving
dishonesty, fraud, or deceit or commit any act that reflects adversely on their
professional reputation, integrity, or competence.
The first part here regarding professional conduct is clear: no dishonesty, fraud, or
deceit. The second part, while it applies to all conduct by the member, specifically
requires that the act, “reflects adversely on their professional reputation, integrity, or
competence.” The guidance states, in fact, that members must not try to use
enforcement of this Standard against another member to settle personal, political, or
other disputes that are not related to professional ethics or competence.
Recommendations for firms
Develop and adopt a code of ethics and make clear that unethical behavior will
not be tolerated.
Give employees a list of potential violations and sanctions, including dismissal.
Check references of potential employees.
MODULE 2.3: GUIDANCE FOR STANDARD II
STANDARD II: INTEGRITY OF CAPITAL
MARKETS
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Standard II(A) Material Nonpublic Information
Members and Candidates who possess material nonpublic information that could
affect the value of an investment must not act or cause others to act on the
information.
Information is “material” if its disclosure would affect the price of a security or if a
reasonable investor would want the information before making an investment decision.
Information that is ambiguous as to its likely effect on price may not be considered
material.
Information is “nonpublic” until it has been made available to the marketplace. An
analyst conference call is not public disclosure. Selective disclosure of information by
corporations creates the potential for insider-trading violations.
The prohibition against acting on material nonpublic information extends to mutual
funds containing the subject securities as well as related swaps and options contracts. It
is the member’s responsibility to determine if information she receives has been
publicly disseminated prior to acting or causing others to act on it.
Some members and candidates may be involved in transactions during which they are
provided with material nonpublic information by firms (e.g., investment banking
transactions). Members and candidates may use this information for its intended
purpose, but must not use the information for any other purpose unless it becomes
public information.
Under the so-called mosaic theory, reaching an investment conclusion through
perceptive analysis of public information combined with non-material nonpublic
information is not a violation of the Standard.
Recommendations for members
Make reasonable efforts to achieve public dissemination by the firm of
information they possess.
Encourage their firms to adopt procedures to prevent the misuse of material
nonpublic information.
Recommendations for firms
Issue press releases prior to analyst meetings to assure public dissemination of any
new information.
Adopt procedures for equitable distribution of information to the market place
(e.g., new research opinions and reports to clients).
Establish firewalls within the organization for who may and may not have access
to material nonpublic information. Generally, this includes having the legal or
compliance department clear interdepartmental communications, reviewing
employee trades, documenting procedures to limit information flow, and carefully
reviewing or restricting proprietary trading whenever the firm possesses material
nonpublic information on the securities involved.
Ensure that procedures for proprietary trading are appropriate to the strategies
used. A blanket prohibition is not required.
Develop procedures to enforce firewalls with complexity consistent with the
complexity of the firm.
Physically separate departments.
Have a compliance (or other) officer review and authorize information flows
before sharing.
Maintain records of information shared.
Limit personal trading, require that it be reported, and establish a restricted list of
securities in which personal trading is not allowed.
Regularly communicate with and train employees to follow procedures.
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Members and Candidates must not engage in practices that distort prices or artificially
inflate trading volume with the intent to mislead market participants.
Member actions may affect security values and trading volumes without violating this
Standard. The key point here is that if there is the intent to mislead, then the Standard is
violated. Of course, spreading false information to affect prices or volume is a violation
of this Standard as is making trades intended to mislead market participants.
MODULE QUIZ 2.1, 2.2, 2.3
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1. In situations where the laws of a member or candidate’s country of residence, the
local laws of regions where the member or candidate does business, and the
Code and Standards specify different requirements, the member or candidate
must abide by:
A. local law or the Code and Standards, whichever is stricter.
B. the Code and Standards or his country’s laws, whichever are stricter.
C. the strictest of local law, his country’s laws, or the Code and Standards.
2. According to the Standard on independence and objectivity, members and
candidates:
A. may accept gifts or bonuses from clients.
B. may not accept compensation from an issuer of securities in return for
producing research on those securities.
C. should consider credit ratings issued by recognized agencies to be
objective measures of credit quality.
3. Bill Cooper finds a table of historical bond yields on the website of the U.S.
Treasury that supports the work he has done in his analysis and includes the
table as part of his report without citing the source. Has Cooper violated the Code
and Standards?
A. Yes, because he did not cite the source of the table.
B. Yes, because he did not verify the accuracy of the information.
C. No, because the table is from a recognized source of financial or statistical
data.
4. Which of the following statements about the Standard on misconduct is most
accurate?
A. Misconduct applies only to a member or candidate’s professional activities.
B. Neglecting to perform due diligence when required is an example of
misconduct.
C. A member or candidate commits misconduct by engaging in any illegal
activity, such as a parking ticket offense.
5. Ed Ingus, CFA, visits the headquarters and main plant of Bullitt Company and
observes that inventories of unsold goods appear unusually large. From the CFO,
he learns that a recent increase in returned items may result in earnings for the
current quarter that are below analysts’ estimates. Bullitt plans to make this
conclusion public next week. Based on his visit, Ingus changes his
recommendation on Bullitt to “Sell.” Has Ingus violated the Standard concerning
material nonpublic information?
A. Yes.
B. No, because the information he used is not material.
C. No, because his actions are consistent with the mosaic theory.
6. Green Brothers, an emerging market fund manager, has two of its subsidiaries
simultaneously buy and sell emerging market stocks. In its marketing literature,
Green Brothers cites the overall emerging market volume as evidence of the
market’s liquidity. As a result of its actions, more investors participate in the
emerging markets fund. Green Brothers most likely:
A. did not violate the Code and Standards.
B. violated the Standard regarding market manipulation.
C. violated the Standard regarding performance presentation.
MODULE 2.4: GUIDANCE FOR STANDARDS III(A) AND
III(B)
STANDARD III: DUTIES TO CLIENTS
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Standard III(A) Loyalty, Prudence, and Care
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must act with reasonable care and exercise prudent judgment.
Members and Candidates must act for the benefit of their clients and place their
clients’ interests before their employer’s or their own interests.
Client interests always come first. Although this Standard does not impose a fiduciary
duty on members or candidates where one did not already exist, it does require members
and candidates to act in their clients’ best interests and recommend products that are
suitable given their clients’ investment objectives and risk tolerances. Members and
candidates must:
Exercise the prudence, care, skill, and diligence under the circumstances that a
person acting in a like capacity and familiar with such matters would use.
Manage pools of client assets in accordance with the terms of the governing
documents, such as trust documents or investment management agreements.
Make investment decisions in the context of the total portfolio.
Inform clients of any limitations in an advisory relationship (e.g., an advisor who
may only recommend her own firm’s products).
Vote proxies in an informed and responsible manner. Due to cost-benefit
considerations, it may not be necessary to vote all proxies.
Client brokerage, or “soft dollars” or “soft commissions,” must be used to benefit
the client.
The “client” may be the investing public as a whole rather than a specific entity or
person.
Recommendations for members
Submit to clients, at least quarterly, itemized statements showing all securities in
custody and all debits, credits, and transactions. Disclose where client assets are held
and if they are moved. Keep client assets separate from others’ assets.
If in doubt as to the appropriate action, what would you do if you were the client? If still
in doubt, disclose and seek written client approval.
Encourage firms to address these topics when drafting policies and procedures
regarding fiduciary duty:
Follow applicable rules and laws.
Establish investment objectives of client.
Consider suitability of a portfolio relative to the client’s needs and circumstances,
the investment’s basic characteristics, or the basic characteristics of the total
portfolio.
Diversify unless account guidelines dictate otherwise.
Deal fairly with all clients in regard to investment actions.
Disclose conflicts of interest.
Disclose manager compensation arrangements.
Regularly review actions for consistency with documents.
Vote proxies in the best interest of clients and ultimate beneficiaries.
Maintain confidentiality.
Seek best execution.
Put client interests first.
Standard III(B) Fair Dealing
Members and Candidates must deal fairly and objectively with all clients when
providing investment analysis, making investment recommendations, taking
investment action, or engaging in other professional activities.
Do not discriminate against any clients when disseminating recommendations or taking
investment action. “Fairly” does not mean “equally.” In the normal course of business,
there will be differences in the time emails, faxes, and other communications are
received by different clients.
Different service levels are acceptable, but they must not negatively affect or
disadvantage any clients. Disclose the different service levels to all clients and
prospects, and make premium levels of service available to all those willing to pay for
them.
Give all clients a fair opportunity to act on every recommendation. Clients who are
unaware of a change in the recommendation for a security should be advised of the
change before an order for the security is accepted.
Treat clients fairly in light of their investment objectives and circumstances. Treat both
individual and institutional clients in a fair and impartial manner. Members and
candidates should not take advantage of their position in the industry to disadvantage
clients (e.g., taking shares of an oversubscribed IPO).
Recommendations for members
Encourage firms to establish compliance procedures requiring proper
dissemination of investment recommendations and fair treatment of all customers
and clients.
Maintain a list of clients and holdings—use to ensure that all holders are treated
fairly.
Recommendations for firms
Limit the number of people who are aware that a change in recommendation will
be made.
Shorten the time frame between decision and dissemination.
Publish personnel guidelines for pre-dissemination—have in place guidelines
prohibiting personnel who have prior knowledge of a recommendation from
discussing it or taking action on the pending recommendation.
Disseminate new or changed recommendations simultaneously to all clients who
have expressed an interest or for whom an investment is suitable.
Establish systematic account review—ensure that no client is given preferred
treatment and that investment actions are consistent with the account’s objectives.
Disclose available levels of service and the associated fees.
Disclose trade allocation procedures.
Develop written trade allocation procedures to:
Document and time stamp all orders.
Bundle orders and then execute on a first come, first fill basis.
Allocate partially filled orders.
Provide the same net (after costs) execution price to all clients in a block
trade.
MODULE 2.5: GUIDANCE FOR STANDARDS
III(C), III(D), AND III(E)
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Standard III(C) Suitability
1. When Members and Candidates are in an advisory relationship with a client,
they must:
a. Make a reasonable inquiry into a client’s or prospective client’s
investment experience, risk and return objectives, and financial constraints
prior to making any investment recommendation or taking investment
action and must reassess and update this information regularly.
b. Determine that an investment is suitable to the client’s financial situation
and consistent with the client’s written objectives, mandates, and
constraints before making an investment recommendation or taking
investment action.
c. Judge the suitability of investments in the context of the client’s total
portfolio.
2. When Members and Candidates are responsible for managing a portfolio to a
specific mandate, strategy, or style, they must make only investment
recommendations or take only investment actions that are consistent with the
stated objectives and constraints of the portfolio.
In advisory relationships, members must gather client information at the beginning of
the relationship, in the form of an investment policy statement (IPS). Consider clients’
needs and circumstances and, thus, their risk tolerance. Consider whether or not the use
of leverage is suitable for the client.
If a member is responsible for managing a fund to an index or other stated mandate, he
must select only investments that are consistent with the stated mandate.
Unsolicited trade requests
An investment manager may receive a client request to purchase a security that the
manager knows is unsuitable, given the client’s investment policy statement. The trade
may or may not have a material effect on the risk characteristics of the client’s total
portfolio and the requirements are different for each case. In either case, however, the
manager should not make the trade until he has discussed with the client the reasons
(based on the IPS) that the trade is unsuitable for the client’s account.
If the manager determines that the effect on the risk/return profile of the client’s total
portfolio is minimal, the manager, after discussing with the client how the trade does not
fit the IPS goals and constraints, may follow his firm’s policy with regard to unsuitable
trades. Regardless of firm policy, the client must acknowledge the discussion and an
understanding of why the trade is unsuitable.
If the trade would have a material impact on the risk/return profile of the client’s total
portfolio, one option is to update the IPS so the client accepts a changed risk profile that
would permit the trade. If the client will not accept a changed IPS, the manager may
follow firm policy, which may allow the trade to be made in a separate client-directed
account. In the absence of other options, the manager may need to reconsider whether to
maintain the relationship with the client.
Recommendations for members
Establish a written IPS, considering type of client and account beneficiaries, the
objectives, constraints, and the portion of the client’s assets managed.
Review the IPS annually and update for material changes in client and market
circumstances.
Develop policies and procedures to assess suitability of portfolio changes.
Consider the impact on diversification, risk, and meeting the client’s investment
strategy.
Standard III(D) Performance Presentation
When communicating investment performance information, Members and Candidates
must make reasonable efforts to ensure that it is fair, accurate, and complete.
Members must not misstate performance or mislead clients or prospects about their
investment performance or their firm’s investment performance.
Members must not misrepresent past performance or reasonably expected performance,
and must not state or imply the ability to achieve a rate of return similar to that achieved
in the past.
For brief presentations, members must make detailed information available on request
and indicate that the presentation has offered only limited information.
Recommendations for members
Encourage firms to adhere to Global Investment Performance Standards.
Consider the sophistication of the audience to whom a performance presentation is
addressed.
Present the performance of a weighted composite of similar portfolios rather than
the performance of a single account.
Include terminated accounts as part of historical performance and clearly state
when they were terminated.
Include all appropriate disclosures to fully explain results (e.g., model results
included, gross or net of fees, etc.).
Maintain data and records used to calculate the performance being presented.
Standard III(E) Preservation of Confidentiality
Members and Candidates must keep information about current, former, and
prospective clients confidential unless:
1. The information concerns illegal activities on the part of the client;
2. Disclosure is required by law; or
3. The client or prospective client permits disclosure of the information.
If illegal activities by a client are involved, members may have an obligation to report
the activities to authorities.
The confidentiality Standard extends to former clients as well.
The requirements of this Standard are not intended to prevent members and candidates
from cooperating with a CFA Institute Professional Conduct Program (PCP)
investigation.
Recommendations for members
Members should avoid disclosing information received from a client except to
authorized coworkers who are also working for the client. Consider whether the
disclosure is necessary and will benefit the client.
Members should follow firm procedures for storage of electronic data and
recommend adoption of such procedures if they are not in place.
Assure client information is not accidentally disclosed.
MODULE QUIZ 2.4, 2.5
To best evaluate your performance, enter your quiz answers online.
1. Cobb, Inc., has hired Jude Kasten, CFA, to manage its pension fund. The client(s)
to whom Kasten owes her primary duty of loyalty is:
A. Cobb’s management.
B. the shareholders of Cobb, Inc.
C. the beneficiaries of the pension fund.
2. Which of the following actions is most likely a violation of the Standard on fair
dealing?
A. A portfolio manager allocates IPO shares to all client accounts where it is
suitable, including her brother’s fee-based retirement account.
B. An investment firm routinely begins trading for its own account
immediately after announcing recommendation changes to clients.
C. After releasing a general recommendation to all clients, an analyst calls the
firm’s largest institutional clients to discuss the recommendation in more
detail.
3. The Standard regarding suitability most likely requires that:
A. an advisor must analyze an investment’s suitability for the client prior to
recommending or acting on the investment.
B. a member or candidate must decline to carry out an unsolicited transaction
that she believes is unsuitable for the client.
C. when managing an index fund, a manager who is evaluating potential
investments must consider their suitability for the fund’s shareholders.
4. Which of the following is most likely a recommended procedure for complying
with the Standard on performance presentation?
A. Exclude terminated accounts from past performance history.
B. Present the performance of a representative account to show how a
composite has performed.
C. Consider the level of financial knowledge of the audience to whom the
performance is presented.
5. The CFA Institute Professional Conduct Program (PCP) has begun an investigation
into Chris Jones, a Level II CFA candidate, and a number of his CFA Charterholder
colleagues. Jones has access to confidential client records that could be useful in
clearing his name and wishes to share this information with the PCP. Which of the
following most accurately describes Jones’s duties with regard to preservation of
confidentiality?
A. Sharing the confidential information with the PCP would violate the
Standards.
B. The Standards encourage, but do not require, that Jones support the PCP
investigation into his colleagues.
C. Jones may share confidential information about former clients with the PCP
but may not share confidential information about current clients.
MODULE 2.6: GUIDANCE FOR STANDARD IV
STANDARD IV: DUTIES TO EMPLOYERS
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Standard IV(A) Loyalty
In matters related to their employment, Members and Candidates must act for the
benefit of their employer and not deprive their employer of the advantage of their
skills and abilities, divulge confidential information, or otherwise cause harm to their
employer.
This Standard is applicable to employees. If members are independent contractors,
rather than employees, they have a duty to abide by the terms of their agreements.
Members must not engage in any activities that would injure the firm, deprive it of
profit, or deprive it of the advantage of employees’ skills and abilities.
Members should always place client interests above interests of their employer, but
consider the effects of their actions on firm integrity and sustainability.
There is no requirement that the employee put employer interests ahead of family and
other personal obligations; it is expected that employers and employees will discuss
such matters and balance these obligations with work obligations.
There may be isolated cases where a duty to one’s employer may be violated in order to
protect clients or the integrity of the market, when the actions are not for personal gain.
This may be referred to as whistle-blowing.
Independent practice for compensation is allowed if a notification is provided to the
employer fully describing all aspects of the services, including compensation, duration,
and the nature of the activities and the employer consents to all terms of the proposed
independent practice before it begins.
PROFESSOR’S NOTE
The distinction between an employee and contractor is important in applying this and other
standards. Think of it as employee status conveys an implication of an exclusive work
relationship with the employer and contractor does not. To engage in outside practice or
accept additional compensation requires disclosure and approval from the employer. But
consider an individual who directly offers services to various clients. The manager is selfemployed. With no inference of exclusivity, there is no need to notify or receive approval to
add another client. This still leaves other responsibilities in place. If the clients expected or
were told the manager is full time self-employed and goes to part time or also becomes an
employee at another firm, that is almost certainly material to any reasonable client and must
be disclosed.
When leaving an employer, members must continue to act in their employer’s best
interests until their resignation is effective. Activities that may constitute a violation
include:
Misappropriation of trade secrets.
Misuse of confidential information.
Soliciting employer’s clients prior to leaving.
Self-dealing.
Misappropriation of client lists.
Employer records on any medium (e.g., home computer, tablet, cell phone) are the
property of the firm.
When an employee has left a firm, simple knowledge of names and existence of former
clients is generally not confidential. There is also no prohibition on the use of
experience or knowledge gained while with a former employer. If an agreement exists
among employers (e.g., the U.S. “Protocol for Broker Recruiting”) that permits brokers
to take certain client information when leaving a firm, a member may act within the
terms of the agreement without violating the Standard.
Members and candidates must adhere to their employers’ policies concerning social
media. When planning to leave an employer, members and candidates must ensure that
their social media use complies with their employers’ policies for notifying clients about
employee separations.
Recommendations for members
Keep personal and professional social media accounts separate. Business-related
accounts approved by the firm constitute employer assets.
Understand and follow the employer’s policies regarding competitive activities,
termination of employment, whistleblowing, and whether you are considered a
full- or part-time employee, or a contractor.
Recommendations for firms
Employers should not have incentive and compensation systems that encourage
unethical behavior.
Establish codes of conduct and related procedures.
Standard IV(B) Additional Compensation Arrangements
Members and Candidates must not accept gifts, benefits, compensation, or
consideration that competes with or might reasonably be expected to create a conflict
of interest with their employer’s interest unless they obtain written consent from all
parties involved.
Compensation includes direct and indirect compensation from a client and other
benefits received from third parties.
Written consent from a member’s employer includes email communication.
Understand the difference between an additional compensation arrangement and a gift
from a client:
If a client offers a bonus that depends on the future performance of her account,
this is an additional compensation arrangement that requires written consent in
advance.
If a client offers a bonus to reward a member for her account’s past performance,
this is a gift that requires disclosure to the member’s employer to comply with
Standard I(B) Independence and Objectivity.
Recommendations for members
Make an immediate written report to the employer detailing any proposed compensation
and services, if additional to that provided by the employer. It should disclose the
nature, approximate amount, and duration of compensation.
Members and candidates who are hired to work part time should discuss any
arrangements that may compete with their employer’s interest at the time they are hired
and abide by any limitations their employer identifies.
Standard IV(C) Responsibilities of Supervisors
Members and Candidates must make reasonable efforts to ensure that anyone subject
to their supervision or authority complies with applicable laws, rules, regulations, and
the Code and Standards.
Members with employees subject to her control or influence must have in-depth
knowledge of the Code and Standards. Those members must make reasonable efforts to
prevent employees from violating laws, rules, regulations, or the Code and Standards, as
well as make reasonable efforts to detect violations.
An adequate compliance system must meet industry standards, regulatory requirements,
and the requirements of the Code and Standards.
Members with supervisory responsibilities have an obligation to bring an inadequate
compliance system to the attention of firm’s management and recommend corrective
action.
A member or candidate faced with no compliance procedures or with procedures he
believes are inadequate must decline supervisory responsibility in writing until adequate
procedures are adopted by the firm.
Recommendations for members
A member should recommend that his employer adopt a code of ethics. Members
should encourage employers to provide their codes of ethics to clients.
Once the compliance program is instituted, the supervisor should:
Distribute it to the proper personnel.
Update it as needed.
Continually educate staff regarding procedures.
Issue reminders as necessary.
Require professional conduct evaluations.
Review employee actions to monitor compliance and identify violations.
Respond promptly to violations, investigate thoroughly, increase supervision
while investigating the suspected employee, and consider changes to prevent
future violations.
Recommendations for firms
Do not confuse the code with compliance. The code is general principles in plain
language. Compliance is detailed procedures to meet the code.
Compliance procedures should:
Be clearly written.
Be easy to understand.
Designate a compliance officer with authority clearly defined.
Have a system of checks and balances.
Establish a hierarchy of supervisors.
Outline the scope of procedures.
Outline what conduct is permitted.
Contain procedures for reporting violations and sanctions.
The supervisor must then:
Disseminate the compliance program to appropriate personnel and periodically
update the program.
Continually educate and remind personnel to follow the program.
Make professional conduct review part of employee review.
Review employee actions to identify and then correct violations.
When a violation is detected, the supervisor must:
Respond promptly and investigate thoroughly.
Supervise the accused closely until the issue is resolved.
Consider changes to minimize future violations.
Ethics education will not deter fraud, but when combined with regular compliance
training, it will establish an ethical culture and alert employees to potential ethical and
legal pitfalls.
Incentive compensation plans must reinforce ethical behavior by designing them to
align employee incentives with client best interests (e.g., don’t incent inappropriate risk
taking or other actions detrimental to the client).
MODULE 2.7: GUIDANCE FOR STANDARD V
STANDARD V: INVESTMENT ANALYSIS,
RECOMMENDATIONS, AND ACTIONS
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Standard V(A) Diligence and Reasonable Basis
Members and Candidates must:
1. Exercise diligence, independence, and thoroughness in analyzing investments,
making investment recommendations, and taking investment actions.
2. Have a reasonable and adequate basis, supported by appropriate research and
investigation, for any investment analysis, recommendation, or action.
The application of this Standard depends on the investment philosophy adhered to,
members’ and candidates’ roles in the investment decision-making process, and the
resources and support provided by employers. These factors dictate the degree of
diligence, thoroughness of research, and the proper level of investigation required.
The level of research needed to satisfy the requirement for due diligence will differ
depending on the product or service offered. A list of things that should be considered
prior to making a recommendation or taking investment action includes:
Global and national economic conditions.
A firm’s financial results and operating history, and the business cycle stage.
Fees and historical results for a mutual fund.
Limitations of any quantitative models used.
A determination of whether peer group comparisons for valuation are appropriate.
Evaluate the quality of third-party research. Examples of criteria to use in judging
quality are:
Review assumptions used.
Determine how rigorous the analysis was.
Identify how timely the research is.
Evaluate objectivity and independence of the recommendations.
When using quantitative research such as computer-based models, screens, and
rankings, members need not be experts. However, they must understand the basic
assumptions and risks and consider a range of input values and the resulting effects on
output. When creating such models, a higher level of knowledge and understanding is
required.
Develop standardized criteria to evaluate external advisors and subadvisors, such as
considering:
The advisors’ code of ethics plus their compliance and control procedures.
The quality of their return information and process to maintain adherence to
intended strategy.
When participating in group research or decision making, members who disagree need
not dissent or disassociate from the final conclusion, as long as the conclusion was
based on a reasonable and adequate basis and was independently and objectively
developed.
Recommendations for members
Members should encourage their firms to consider these policies and procedures
supporting this Standard:
Have a policy requiring that research reports and recommendations have a basis
that can be substantiated as reasonable and adequate.
Have detailed, written guidance for proper research, supervision, and due
diligence.
Have measurable criteria for judging the quality of research, and base analyst
compensation on such criteria.
Have written procedures that provide a minimum acceptable level of scenario
testing for computer-based models and include standards for the range of
scenarios, model accuracy over time, and a measure of the sensitivity of cash
flows to model assumptions and inputs.
Have a policy for evaluating outside providers of information that addresses the
reasonableness and accuracy of the information provided and establishes how
often the evaluations should be repeated.
Adopt a set of standards that provides criteria for evaluating external advisers and
states how often a review of external advisers will be performed.
Standard V(B) Communication with Clients and Prospective Clients
Members and Candidates must:
1. Disclose to clients and prospective clients the basic format and general
principles of the investment processes they use to analyze investments, select
securities, and construct portfolios and must promptly disclose any changes that
might materially affect those processes.
2. Disclose to clients and prospective clients significant limitations and risks
associated with the investment process.
3. Use reasonable judgment in identifying which factors are important to their
investment analyses, recommendations, or actions and include those factors in
communications with clients and prospective clients.
4. Distinguish between fact and opinion in the presentation of investment analyses
and recommendations.
All means and types of communication with clients are covered by this Standard, not
just research reports or other written communications.
Members must distinguish between opinions and facts and always include the basic
characteristics of the security being analyzed in a research report. Expectations based on
statistical modeling and analysis are not facts.
Members must explain to clients and prospects the investment decision-making process
used.
In preparing recommendations for structured securities, allocation strategies, or any
other nontraditional investment, members must communicate those risk factors specific
to such investments.
Members must communicate significant changes in the risk characteristics of an
investment or investment strategy.
Members must update clients regularly about any changes in the investment process,
including any risks and limitations that have been newly identified.
When using projections from quantitative models and analysis, members may violate
the Standard by not explaining the limitations of the model and the assumptions it uses,
which provides a context for judging the uncertainty regarding the estimated investment
result.
Members and candidates must inform clients about limitations inherent to an
investment. Two examples of such limitations are liquidity and capacity. Liquidity
refers to the ability to exit an investment readily without experiencing a significant extra
cost from doing so. Capacity refers to an investment vehicle’s ability to absorb
additional investment without reducing the returns it is able to achieve.
Recommendations for members
Selection of relevant factors in a report can be a judgment call so members should
maintain records indicating the nature of the research, and be able to supply additional
information if it is requested by the client or other users of the report.
Encourage the firm to establish a rigorous method of reviewing research work and
results.
Standard V(C) Record Retention 专业提供CFA/FRM/AQF视频课程资料 微信：fcayyh
Members and Candidates must develop and maintain appropriate records to support
their investment analyses, recommendations, actions, and other investment-related
communications with clients and prospective clients.
Members must maintain research records that support the reasons for the analyst’s
conclusions and any investment actions taken. Such records are the property of the firm.
All communications with clients through any medium, including emails and text
messages, are records that must be retained.
A member who changes firms must re-create the analysis documentation supporting her
recommendation using publicly available information or information obtained from the
company and must not rely on memory or materials created at her previous firm.
Recommendations for members
Maintain notes and documents to support all investment communications.
Recommendations for firms
If no regulatory standards or firm policies are in place, the Standard recommends a
seven-year minimum holding period.
MODULE QUIZ 2.6, 2.7
To best evaluate your performance, enter your quiz answers online.
1. Connie Fletcher, CFA, works for a small money management firm that specializes
in pension accounts. Recently, a friend asked her to act as an unpaid volunteer
manager for the city’s street sweep pension fund. As part of the position, the city
would grant Fletcher a free parking space in front of her downtown office. Before
Fletcher accepts, she should most appropriately:
A. do nothing because this is a volunteer position.
B. inform her current clients in writing and discuss the offer with her
employer.
C. disclose the details of the volunteer position to her employer and obtain
written permission from her employer.
2. Sarah Johnson, a portfolio manager, is offered a bonus directly by a client if
Johnson meets certain performance goals. To comply with the Standard that
governs additional compensation arrangements, Johnson should:
A. decline to accept a bonus outside of her compensation from her employer.
B. disclose this arrangement to her employer in writing and obtain her
employer’s permission.
C. disclose this arrangement to her employer only if she actually meets the
performance goals and receives the bonus.
3. A member or candidate who has supervisory responsibility:
A. should place particular emphasis on enforcing investment-related
compliance policies.
B. is responsible for instructing those to whom he has delegated authority
about methods to detect and prevent violations of the law and the Code
and Standards.
C. has complied with the Standards if she reports employee violations to
upper management and provides a written warning to the employee to
cease such activities.
4. Which of the following actions is a required, rather than recommended, action
under the Standard regarding diligence and a reasonable basis for a firm’s
research recommendations?
A. Compensate analysts based on a measure of the quality of their research.
B. Review the assumptions used and evaluate the objectivity of third-party
research reports.
C. Have a policy requiring that research reports and recommendations have a
basis that can be substantiated as reasonable and adequate.
5. Claire Marlin, CFA, manages an investment fund specializing in foreign currency
trading. Marlin writes a report to investors based on an expected appreciation of
the euro relative to other major currencies. Marlin shows the projected returns
from the strategy under three favorable scenarios: if the euro appreciates less
than 5%, between 5% and 10%, or more than 10%. She clearly states that these
forecasts are her opinion. Has Marlin violated the Standard related to
communication with clients?
A. Yes.
B. No, because she disclosed the basic characteristics of the investment.
C. No, because she distinguished fact from opinion and discussed how the
strategy may perform under a range of scenarios.
6. If regulations do not specify how long to retain the documents that support an
analyst’s conclusions, the Code and Standards recommend a period of at least:
A. 5 years.
B. 7 years.
C. 10 years.
MODULE 2.8: GUIDANCE FOR STANDARD VI
STANDARD VI: CONFLICTS OF INTEREST
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Standard VI(A) Disclosure of Conflicts 专业提供CFA/FRM/AQF视频课程资料 微信：fcayyh
Members and Candidates must make full and fair disclosure of all matters that could
reasonably be expected to impair their independence and objectivity or interfere with
respective duties to their clients, prospective clients, and employer. Members and
Candidates must ensure that such disclosures are prominent, are delivered in plain
language, and communicate the relevant information effectively.
Members must fully disclose to clients, prospects, and their employers all actual and
potential conflicts of interest in order to protect investors and employers. These
disclosures must be clearly stated.
The requirement that all potential areas of conflict be disclosed allows clients and
prospects to judge motives and potential biases for themselves. Disclosure of brokerdealer market-making activities would be included here. Board service is another area
of potential conflict.
The most common conflict that requires disclosure is actual ownership of stock in
companies that the member recommends or that clients hold.
Another common source of conflicts of interest is a member’s compensation/bonus
structure, which can potentially create incentives to take actions that produce immediate
gains for the member with little or no concern for longer-term returns for the client.
Such conflicts must be disclosed when the member is acting in an advisory capacity and
must be updated in the case of significant change in compensation structure.
Members must give their employers enough information to judge the impact of a
conflict, take reasonable steps to avoid conflicts, and report them promptly if they
occur.
Recommendations for members
Any special compensation arrangements, bonus programs, commissions, performancebased fees, options on the firm’s stock, and other incentives should be disclosed to
clients. If the firm refuses to allow this disclosure, document the refusal and consider
disassociating from the firm.
Standard VI(B) Priority of Transactions 专业提供CFA/FRM/AQF视频课程资料 微信：fcayyh
Investment transactions for clients and employers must have priority over investment
transactions in which a Member or Candidate is the beneficial owner.
Client transactions take priority over personal transactions and over transactions made
on behalf of the member’s firm. Personal transactions include situations where the
member is a beneficial owner.
Personal transactions may be undertaken only after clients and the member’s employer
have had an adequate opportunity to act on a recommendation. Note that family member
accounts that are client accounts should be treated just like any client account; they
should not be disadvantaged.
Members must not act on information about pending trades for personal gain. The
overriding considerations with respect to personal trades are that they do not
disadvantage any clients.
When requested, members must fully disclose to investors their firm’s personal trading
policies.
Recommendations for members
Members should encourage their firms to adopt the procedures listed in the following
recommendations for firms and disclose these to clients.
Recommendations for firms
All firms should have basic procedures in place that address conflicts created by
personal investing. The following areas should be included:
Establish limitations on employee participation in equity IPOs and systematically
review such participation.
Establish restrictions on participation in private placements. Strict limits should be
placed on employee acquisition of these securities and proper supervisory
procedures should be in place. Participation in these investments raises conflict of
interest issues similar to those of IPOs.
Establish blackout/restricted periods. Employees involved in investment decision
making should have blackout periods prior to trading for clients—no front
running (i.e., purchase or sale of securities in advance of anticipated client or
employer purchases and sales). The size of the firm and the type of security
should help dictate how severe the blackout requirement should be.
Establish reporting procedures, including duplicate trade confirmations, disclosure
of personal holdings and beneficial ownership positions, and preclearance
procedures.
Disclose, upon request, the firm’s policies regarding personal trading.
Standard VI(C) Referral Fees
Members and Candidates must disclose to their employer, clients, and prospective
clients, as appropriate, any compensation, consideration, or benefit received from or
paid to others for the recommendation of products or services.
Members must inform employers, clients, and prospects of any benefit received for
referrals of customers and clients, allowing them to evaluate the full cost of the service
as well as any potential partiality. All types of consideration must be disclosed.
Recommendations for members
Members should encourage their firms to adopt clear procedures regarding
compensation for referrals.
Recommendations for firms
Have an investment professional advise the clients at least quarterly on the nature and
amount of any such compensation.
MODULE 2.9: GUIDANCE FOR STANDARD VII
STANDARD VII: RESPONSIBILITIES AS A CFA
INSTITUTE MEMBER OR CFA CANDIDATE
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Standard VII(A) Conduct as Participants in CFA Institute Programs
Members and Candidates must not engage in any conduct that compromises the
reputation or integrity of CFA Institute or the CFA designation or the integrity,
validity, or security of CFA Institute programs.
Members must not engage in any activity that undermines the integrity of the CFA
charter. This Standard applies to conduct that includes:
Cheating on the CFA exam or any exam.
Revealing anything about either broad or specific topics tested, content of exam
questions, or formulas required or not required on the exam.
Not following rules and policies of the CFA Program.
Giving confidential information on the CFA Program to candidates or the public.
Improperly using the designation to further personal and professional goals.
Misrepresenting information on the Professional Conduct Statement (PCS) or the
CFA Institute Professional Development Program.
Members and candidates are not precluded from expressing their opinions regarding the
exam program or CFA Institute but must not reveal confidential information about the
CFA Program.
Candidates who violate any of the CFA exam policies (e.g., calculator, personal
belongings, Candidate Pledge) have violated Standard VII(A).
Members who volunteer in the CFA Program may not solicit or reveal information
about questions considered for or included on a CFA exam, about the grading process,
or about scoring of questions.
Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA
Program
When referring to CFA Institute, CFA Institute membership, the CFA designation, or
candidacy in the CFA Program, Members and Candidates must not misrepresent or
exaggerate the meaning or implications of membership in CFA Institute, holding the
CFA designation, or candidacy in the CFA Program.
Members must not make promotional promises or guarantees tied to the CFA
designation, such as over-promising individual competence or over-promising
investment results in the future (i.e., higher performance, less risk, etc.).
Members must satisfy these requirements to maintain membership:
Sign the PCS annually.
Pay CFA Institute membership dues annually.
If they fail to do this, they are no longer active members.
Do not misrepresent or exaggerate the meaning of the CFA designation.
There is no partial CFA designation. It is acceptable to state that a candidate
successfully completed the program in three years if, in fact, he did, but claiming
superior ability because of this is not permitted.
Recommendations for members
Members should be sure that their firms are aware of the proper references to a
member’s CFA designation or candidacy, as errors in these references are common.
MODULE QUIZ 2.8, 2.9
To best evaluate your performance, enter your quiz answers online.
1. Daniel Lyons, CFA, is an analyst who covers several stocks, including Horizon
Company. Lyons’s aunt owns 30,000 shares of Horizon. She informs Lyons that
she has created a trust in his name into which she has placed 2,000 shares of
Horizon. The trust is structured so that Lyons will not be able to sell the shares
until his aunt dies, but may vote the shares. Lyons is due to update his research
coverage of Horizon next week. Lyons should most appropriately:
A. update the report as usual because he is not a beneficial owner of the
stock.
B. advise his superiors that he is no longer able to issue research
recommendations on Horizon.
C. disclose the situation to his employer and, if then asked to prepare a
report, also disclose his beneficial ownership of the shares in his report.
2. Kate Wilson, CFA, is an equity analyst. Wilson enters two transactions for her
personal account. Wilson sells 500 shares of Tibon, Inc., a stock on which she
currently has a “Buy” recommendation. Wilson buys 200 shares of Hayfield Co.
and the following day issues a research report on Hayfield with a “Buy”
recommendation. Has Wilson violated the Code and Standards?
A. No.
B. Yes, both of her actions violate the Code and Standards.
C. Yes, but only one of her actions violates the Code and Standards.
3. Hern Investments provides monthly emerging market research to Baker
Brokerage in exchange for prospective client referrals and European equity
research from Baker. Clients and prospects of Hern are not made aware of the
agreement, but clients unanimously rave about the high quality of the research
provided by Baker. As a result of the research, many clients with nondiscretionary accounts have earned substantial returns on their portfolios.
Managers at Hern have also used the research to earn outstanding returns for
the firm’s discretionary accounts. Hern has most likely:
A. not violated the Code and Standards.
B. violated the Code and Standards by using third-party research in
discretionary accounts.
C. violated the Code and Standards by failing to disclose the referral
agreement with Baker.
4. After writing the Level III CFA exam, Cynthia White goes to internet discussion site
CFA Haven to express her frustration. White writes, “CFA Institute is not doing a
competent job of evaluating candidates because none of the questions in the
June exam touched on Alternative Investments.” White most likely violated the
Standard related to conduct as a candidate in the CFA program by:
A. publicly disputing CFA Institute policies and procedures.
B. disclosing subject matter covered or not covered on a CFA exam.
C. participating in an internet forum that is directed toward CFA Program
participants.
5. After passing all three levels of the CFA exams on her first attempts and being
awarded her CFA Charter, Paula Osgood is promoting her new money
management firm by issuing an advertisement. Which of these statements would
most likely violate the Standard related to use of the CFA designation?
A. “To earn the right to use the CFA designation, Paula passed three exams
A. “To earn the right to use the CFA designation, Paula passed three exams
covering ethics, financial statement analysis, asset valuation, and portfolio
management.”
B. “Paula passed three 6-hour exams on her first attempts and is a member of
her local investment analyst society.”
C. “Because of her extensive training, Paula will be able to achieve better
investment results than managers who have not been awarded the CFA
designation.”
ANSWER KEY FOR MODULE QUIZZES
Module Quiz 1.1
1. C The process for enforcing the Code and Standards does not include suspending
a member or candidate while an inquiry is in progress. If CFA Institute
Professional Conduct staff receive information that prompts an inquiry, the staff
may request information from the member or candidate, interview parties who
initiated a complaint, or review relevant records and documents. (LOS 1.a)
2. A One of the six components of the Code of Ethics requires members and
candidates to “maintain and improve their professional competence and strive to